Capitol Update

Tax Reform

Written by Greg Brown
|
08 March 2017

Tax reform is front and center on the congressional agenda, and there is a real chance it will become law this year. The last comprehensive tax reform legislation was the Tax Reform Act of 1986 (TRA 1986) signed into law 30 years ago by President Ronald Reagan. We all remember how that bill devastated the industry for years, so it is imperative that we engage with policymakers to ensure a more positive outcome.

In the years since TRA 1986, legislation has changed the tax code—mainly at the margins—focusing on rate changes and other targeted pro visions while comprehensive reform has eluded policymakers.

The election of Donald Trump and continued Republican control of the Congress has changed the outlook for tax reform. One-party rule where reform is a priority for all of the key players has increased the odds that broad-based legis lation can become law.

At this stage of the process, House Republicans are taking the lead on reform. While President Trump made a number of proposals during the 2016 campaign, it is House Republicans who have put forward the most detailed plan. Entitled “A Better Way Forward for Tax Reform,” the House GOP released a “blueprint” for reform last summer, which is the starting point for their internal discussions. The blueprint would:

• Reduce the top tax rate on LLCs, partnerships, S Corporations and other pass-thru entities to 25 percent from 39.6 percent;• Tax capital gains, dividends, and interest at a maximum rate of 16.5 percent;• Replace depreciation with immediate expensing of all investment except for land;• Eliminate the deduction for business interest;• Eliminate like-kind exchanges;• Eliminate the Low-Income Housing Tax Credit; and• Repeal the estate tax while retaining stepped-up basis for inherited assets.

It is important to note that while the Blueprint appears to eliminate the Low-Income Housing Tax Credit (LIHTC), there are good indications it may be put back into the House GOP proposal.

As the most developed tax reform product in circulation at the moment, the Blueprint is the centerpiece of conversation around tax reform. However, it is not yet legislation, and there could be significant changes made before an actual bill is introduced.

Moreover, the White House and Senate still need to flesh out their own proposals. There is much time to go before a reform agree ment is reached, if at all, and we can expect the details of any agreement to change several times along the way.

For our part, the apartment housing industry’s primary objective in reform is to support legislation that promotes economic growth and investment in rental housing without unfairly burdening apartment owners and renters relative to other asset classes. To this end, we are pushing lawmakers to ensure the following priorities are reflected in any bill that moves forward.

Under this model, a firm’s earnings are passed through to the partners who pay taxes on their individual tax returns. Accordingly, Congress must not reduce corporate tax rates financed by forcing flow through entities to pay higher taxes by subjecting them to a corporate-level tax or by denying credits and deductions.

It is also a priority for the apartment housing industry to maintain “like-kind exchanges” where property owners can defer tax on the gain on sale of an asset if, instead of selling their property, they exchange it for another comparable prop erty. These rules encourage property owners to remain invested in the real estate market. Such an important tool for investment must be maintained in a reformed tax code. Notably, with the exception of land, the expensing proposal in the House Republican Blueprint provides for de facto like-kind exchanges.

Tax reform should also take care to preserve investment incentives. Borrowing is a central part of how apartment housing is financed (a typical development project could be financed with 1/3 capital and 2/3 debt and the tax code has long provided a full deduction for interest). Indeed, without business interest deductibility, the cost of debt financing would increase and shift many real estate business models. This would inhibit devel opment activity at a time when we face significant affordability challenges.

Policymakers should also take care when making changes to cost recovery rules like depreciation so they do not harm real estate investment. Apartment buildings are currently depreciated on a 27.5-year schedule. While House Republicans are proposing to allow buildings to be immediately expensed, others have suggested extending the current law depreciation period. This would surely lead to reduced development and invest ment and ultimately undermine real estate values and stifle job creation.

Finally, protecting the Low-Income Housing Tax Credit (LIHTC) is a priority for the apartment housing industry. The LIHTC is the central vehicle producing housing for moderate- and low-income families. We are in a period of crisis in housing affordability and need stronger incentives like the LIHTC to effectively respond. This program must remain a vital part of the strategy to address our nation’s housing needs.

You will notice some overlap between what is being proposed, at least in the House GOP Blue print, and the apartment housing industry’s priorities. It is important to remember that policy makers are truly looking to reshape how taxes are levied in this country and that perhaps what they propose could effectively replace what is in the tax code now and keep the apartment housing industry whole. We remain open minded on this point as we continue to press for our top priorities and evaluate in detail what tax reform proposals mean for our business.

Every member of the apartment housing industry must be engaged in the advocacy campaign on tax reform. That means contacting your members of Congress and communicating our message.

Changes to the tax code will impact all of us, and it is our responsibility to ensure whatever reform is passed does not harm our ability to provide housing to one-third of the nation. To learn more about how you can get involved in shaping the debate, contact Peter Fromknecht at
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and take our Advocacy Interview at http://re.spon.se/OTmUtG to see who you might know on Capitol Hill! Your relationships with lawmakers and your willingness to act on those relationships will make the difference between success and failure on tax reform.

Carrying the Message

Written by Greg Brown
|
31 January 2017

Mark your calendars and make your travel arrangements for the 2017 NAA Capitol Conference and Lobby Day which will take place March 7 and 8 in Washington, D.C. The Capitol Conference will start after lunch on March 7 with an issues orientation and advocacy training session. We will train you to be an effective advocate for the apartment industry through this high-impact programming, including a presentation by presidential historian and Pulitzer Prize-winning author Doris Kearns Goodwin, our keynote speaker. Both the House and Senate will be in session on Lobby Day, giving everyone an opportunity to connect with their members of Congress. Remember, NAA’s goal is to reach all 535 Congressional offices—that’s 435 Representatives and 100 Senators. There are also more than 50 new members in the 115th Congress making this Lobby Day especially important.

In 2016 NAA focused on three issues during the Capitol Conference—mitigating “drive-by” Americans with Disabilities Act (ADA) lawsuits, streamlining the Section 8 Housing Choice Voucher program and opening up more private sector options for flood insurance. We scored a victory on Section 8 vouchers with passage of the Housing Opportunity through Modernization Act that eliminated much of the bureaucracy around the inspections process.

We were not as successful on the other two issues though our preferred legislation on those topics advanced a great way towards passage. The issues remain critical today so we are reprising our focus on ADA lawsuits and flood insurance at the 2017 Capitol Conference and Lobby Day. The effort on flood insurance has added importance this year as the National Flood Insurance Program (NFIP) will expire in September. Without the NFIP apartment owners and operators would have few, costprohibitive options for flood insurance. This program must be extended and improved.

Added to the list of issues for the 2017 Capitol Conference is tax reform. Back when we all thought Hilary Clinton would be the next President of the United States, the odds of tax reform actually happening were low. There was simply too wide of a gulf between Secretary Clinton and the GOP. Those odds are now flipped on their head. Reform of the tax code was a hot topic during the campaign and President-elect Trump’s team has stated it is a “200-day” priority after the repeal and/or replacement of the Affordable Care Act.

Meanwhile, House Republicans have crafted a proposal they call a “blueprint” for tax reform which suggests some fairly radical changes to the code, including areas impacting real estate. Their goals are generally the same or similar to those of the President-elect but it’s the details that matter. That will be the first level of negotiation.

A critical decision the majority powers must make is what kind of bill they want to pass – the preferred Republican package or a negotiated bill that includes Democratic priorities. Recently, the concept of durability has come up a lot in this context.

Specifically, according to advisors close the President-elect, Congress should take a bipartisan approach to tax reform (like was done in 1986) so that whatever bill is passed survives beyond the GOP majority. The obvious comparison is to the Affordable Care Act—a bill passed on party lines without a single GOP vote that now is almost certain to be repealed or significantly weakened. The President-elect wants a legacy which demands a bipartisan approach.

No matter what route tax reform takes, the apartment industry will have to be involved. Anyone who was in the industry when the Tax Act of 1986 was passed will remember how significant – positive and negative—this legislation was for commercial real estate. This new round of reform is shaping up to be potentially as significant with a lot of specific implications for our industry. Literally everyone who develops, owns or manages apartments or who works for a company that does will be impacted by tax reform. As such, everyone needs to be involved. The table is being set and it’s up to you if you want to be a guest or a main course.

Your lives are very busy and it can be extremely challenging to cram one more task onto an already overflowing list. The good news is that NAA now makes it easy to do your part for the industry. Our new Advocacy365 App puts Congress in the palm of your hand. It’s your year-round indispensable tool that’s packed with resources to keep your finger on the legislative pulse of the apartment industry. The app’s key elements include talking points and fact sheets on the issues, the ability to directly communicate with your legislators, Congressional directories, year-round mobile action alerts sent directly to you and much more. Download the app now and take apartment advocacy with you wherever you go.

Great advocacy means carrying the message to your elected officials all year long. But, the NAA Capitol Conference and Lobby Day is the once-a-year opportunity for our advocates in Washington, D.C., to show the Congress the power of the industry. Go to the NAA website (www.naahq.org) to register and talk with your local affiliated association about being part of the effort. I know you care about the future of your industry, your business and your bottom line and want to be part of our effort to make the voice of the apartment industry heard.

Mixed Outlook

Written by Greg Brown
|
03 January 2017

Add my name to the long list of individuals who did not take the candidacy of Donald Trump seriously and publicly doubted whether he could win a Presidential general election. My sin is even greater since I am inside the beltway and in “the business” of politics and policy. This is my job! How could I have not seen this coming?

I could lay the blame for missing the signs of a Trump victory at the feet of pollsters and pundits on whom I rely to give me the best data and intelligence on the minds of the electorate, but that would be a cop out. Realistically, I think my bias against someone like Donald Trump was in place long before he became a threat. I, like so many in the machine of Washington, D.C., am disconnected from the working class voter in places like Pennsylvania, Wisconsin and Ohio who gave President-elect Trump the White House. While my life and the lives of most of those with whom I am close have hummed along in the present economy, millions of others have watched their jobs disappear with little perceived care or concern from the political system and more precisely the two political parties. Their anger crossed party identification and found a home with Donald Trump.

Okay, so an epic fail on the part of people who should know better. Stipulated. What happens next? What can we expect from a Trump White House? And GOP majorities in both Houses of Congress? With hindsight now available to us, I think managing expectations is important here. Donald Trump promised a lot of things on the campaign trail—the wall, mass deportations, a blockade against Muslims (or some nuanced variation of that), special prosecutor for Hillary Clinton, large-scale tax reform, and shredded trade agreements. He has already softened his rhetoric on several of these items. The wall may turn out to be a fence or simply stronger border-security measures, “mass” deportations will be focused on criminals (something the Obama Administration does now), and continued pursuit of the Clinton email scandal has faded from the priority list.

Certainly many in the body politic will be pleased if these moderations hold; however, others in the Trump coalition will not be happy. Time will tell if he sticks to his new position on these issues, especially with Steve Bannon, the voice of the altright in the President-elect’s ear.

What else happens in a Trump first term will also be heavily influenced by the Congress, of course. And also contrary to expectations, the GOP held its control of the Senate and took only glancing blows to its majority in the House. We have one-party, Republican rule for the first time since 2006. While the control of the levers of power is not absolute (recall the cloture rule in the Senate), it is strong enough that we can expect a more streamlined path to passage for some legislative priorities — Obamacare repeal and regulatory reform, among others. For others, the path remains difficult but is more doable than was anticipated under a Clinton Administration—see tax reform.

For our part, the outlook remains mixed for the apartment industry. Regulatory reform and independent moves by the President-elect to pull back on regulations issued by the Obama team will likely address several areas of concern such as Waters of the United States, the overtime rule and IRS rules on valuation of family-owned businesses. Bigger-picture issues such as the future of Fannie Mae and Freddie Mac, some areas of tax law and immigration reform have the potential to cut both ways for owners and operators of apartment homes. Thus, it is critically important that everyone get involved in NAA’s Advocacy365 program and commit to carrying the message of the apartment industry to their representatives in Congress.

Advocacy365, as the name implies, is a year-round effort; however, there is one particular day when the industry combines forces in Washington, D.C. to show our strength and press the case for our concerns. The 2017 NAA Capitol Conference and Lobby Day takes place on March 7 and 8 at the JW Marriott in downtown Washington. There will be a briefing on the issues, training on how to be an effective advocate and expert perspective on the new Administration from Presidential historian Doris Kearns Goodwin. There are more than 50 new Representatives and Senators who need educating on our industry and our issues and 485 incumbents returning for a new Congress and Administration who want to know where we stand. Please join us.

This is an historic time for our country and we should take stock of that. There is also the reality of public policy concerns that must be our focus in the immediate term. I hope you all will join me in ensuring those concerns are addressed to the benefit of owners, operators and residents.

Housing Affordability

Written by Greg Brown
|
01 November 2016

White House Toolkit Points to Local Barriers to Affordability Crisis

In September the Obama Administration weighed in on one of the seminal issues impacting local communities and one with which our industry finds itself struggling again—housing afford ability.

What might surprise you is that the message from the White House was not directed at property owners. The Housing Development Toolkit (avail able on the whitehouse.gov website) opens with this: Over the past three decades, local barriers to housing development have intensified. The accumulation of such barriers—including zoning, other land use regulations, and lengthy development approval processes—has reduced the ability of many housing markets to respond to growing demand.

The toolkit discusses in specific detail the costs that these barriers impose on local households, the economies and even the environment as well as their role in exacerbating gentrification and income inequality. This is a welcome message from the Administration.

As many of you are experiencing firsthand, the issue of housing affordability increasingly dominates local news and policymaker debates. Beyond the statistics, low- and moderate-income families struggle to find housing that meets their needs at a price they can afford. This is an issue in the usual suspect markets on the coasts, but also in places like Austin, Texas; Nashville, Tennessee; and Colorado Springs, Colorado.

While this current crisis is not breaking news, the scale and scope of the problem seem greater than in previous cycles as does the intensity of the advocacy efforts by tenant-rights’ organizations.

Last month a few NAA affiliate offices and events were picketed by protesters and, in one case, an Association Executive was personally the target of an advocacy campaign. The White House efforts could not come at a better time.

What many advocates seem unwilling to acknowledge is that the seeds for our current crisis were sown long ago in local land development and use policies. As the Housing Development Toolkit notes, when the recovery from the 2008 recession began, many communities were not positioned to take advantage:

In a growing number of metropolitan areas, the returning health of the housing market and vibrant job growth haven’t led to resurgent construction industries and expanding housing options for working families, due to state and local rules inhibiting new housing development that have proliferated in recent decades.

There is also of course the added complicating factor of stagnant wages. No- or low-wage growth is hard enough in markets where demand is “normal.” It is downright dangerous in the growing list of markets where exorbitant development costs and red-hot demand accelerate rent increases.

The toolkit goes on to describe a number of excellent policy options available to local governments to streamline the development process and increase apartment housing supply. Nearly all are positioned as incentives to development and even mandatory inclusionary zoning is described in both mandatory and voluntary terms but the toolkit’s recommendation tilts more towards voluntary incentive for IZ like density bonuses or streamlined approval processes. Rent control is not on the list of policy recommendations.

While not on the list of policy recommendations, the toolkit does make a case of sorts for source-of income protection for Section 8 voucher holders, characterizing a property owner’s choice not to participate in the Section 8 program as “discrimination.” We will continue to respectfully disagree with the Administration on this and stand in support of the freedom of a private owner to take on the responsibilities, and burdens, that come with accepting Section 8 vouchers. NAA has been a vocal, aggressive champion of this program for decades, including its voluntary nature.

Also missing from the toolkit is a strategy for fighting NIMBYism (Not in My Back Yard) that pervades in so many jurisdictions. Truth-be-told, many of the hurdles put in the place of apartment development were put there by NIMBYists who would sacrifice anything to prevent more supply of apartments. More and more local governments, with help from private sector employers, non-profit organizations and others, are standing up to these forces. Those efforts must be replicated around the nation if we are ever to make a dent in this affordability challenge.

Nothing in the toolkit is earth-shattering; however, the focus and emphasis it places on local governments and their central role in the affordability crisis are extremely important. Our hope is that local governments listen and future Administrations make the same commitment.

Make sure to mark your calendars for the 2017 NAA Capitol Conference and Lobby Day on March 7-8, 2017. Our goal is to create another record-breaking event, bringing in more advocates to reach all 535 members of Congress. Registration opens in early November.

Greg can be reached at
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The 2016 General Election

Written by Greg Brown
|
08 June 2016

Like so many people inside the Washington, D.C., beltway, I am eating my words from 11 months ago — “Donald Trump is not a serious candidate and there is no way he will get the GOP nomination,” I said. Even as support for Mr. Trump grew and other, seemingly more viable candidates fell away, I still could not absorb the idea. I have stopped speculating altogether because, well, even I began to believe he could pull it off.

At press time, Donald Trump is poised to claim enough delegates before the Republican National Convention in Cleveland to be the GOP’s standard-bearer in the Presidential race. His particular brand of bravado, policy “flexibility” shall we say, and insight into the minds of some of our country’s most disaffected voters worked in the pri mary and could also work in the general election. Moreover, Mr. Trump is unortho dox, unpredictable and without a filter. Those are usually liabilities for a candidate, but for him they have been assets as his opponents’ more conventional campaign strategies failed.

According to recent polls, Donald Trump starts the race against Hillary Clinton, assuming she is the Democratic nominee, under a 15-point deficit. Further, his overall “unfavorable” rating is nearly 60 percent, while his support among women and the Hispanic community is dismal. Finally, he has to spend time wooing members of his own party to support his candidacy. Endorsements or at least pledges of sup port (some only for “the nominee”) are coming in from Senators, Governors, mem bers of the House, etc., but there are at least as many who are either pledging never to support Mr. Trump or who will not do so now. Even House Speaker Paul Ryan, who is concerned about maintaining his own majority, won’t commit to Mr. Trump yet.

One could argue that Mr. Trump did not need the support of “establishment” Republicans to win the primary, so why does he need them now? Realistically, he needs that support for what it brings—money, surrogates to carry his message and ground troops to help build support within states and local communities. Typically, a Presidential candidate combines efforts with Senators and Representatives running for re-election. That may not be the case here for many candidates for whom Mr. Trump could be a liability.

All this said, it will certainly be no easy ride to victory for Secretary Clinton. Her own unfavorable rating is above 50 percent and there is pretty strong current of distrust of her among voters. Like Donald Trump, the Secretary is not guaranteed to garner the support of all of the communities within her own party. Those voters currently supporting Bernie Sanders might decide that she is too much status quo and not enough revolution. They, like some establishment Republicans, could stay home rather than cast a vote for their nominee. And, there is the email server controversy. While it seems like a dud of an issue for the average voter, an indictment could change the conversation significantly. Finally, Secretary Clinton has thus far been able to run a standard sort of campaign with all of the typical tools, methods and narrative.

There is a lot yet to know about how the general election is going to play out. It depends on when the Democrats sort out their own primary, who Mr. Trump picks as his Vice Presidential running mate, how his tone and rhetoric changes (or does not), whether Secretary Clinton’s legal troubles worsen and the style with which Mr. Trump engages the Secretary (bully or tough opponent). As these and many other elements play out we will revisit this conversation.

Greg can be reached at
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